Garth Turner has made a veritable industry these past few weeks out of calling for the Harper Government to do something to lower the international value of the Canadian dollar (although actually, to be fair, he puts it in the context of its value relative to the US dollar — it’s just that one entails the other). This, he believes, would help keep the manufacturing lights on in Ontario, maybe even in Québec.
Well it might — but at a horrific set of prices to be paid.
We Did The Right Things: Learn to Deal with That
I will unsay none of the nasty things I have previously said about our new Governor of the Bank of Canada, Mark Carney, who seemed, earlier this year, determined to follow in the Alan Greenspan/Ben Bernacke footsteps of currency debasement. Fortunately, at the last rate-setting opportunity, he held off on stepping further into that cesspool of national economic destruction — and a good thing, too.
Mulroney’s Governments licked the operational deficit inherited from Trudeau; Chrétien’s licked the interest-related deficit by slashing further and restoring surpluses. Since the mid-1990s, Canada has been the only major OECD-class economy to run a budgetary surplus each and every year. (Certainly, in recent years, the sheer size of those surpluses indicated that federal tax receipts were damagingly high; still, no one else has managed to come close.)
Add to that the peaking conditions in various commodity markets, and the size of Canadian production — not promise, current production — of those assets, and Canada’s dollar ought to have risen relative to other world currencies, and declined less relative to other “real” measures, such as gold, than others. Until a year ago, that is precisely what was going on. It is why, for instance, oil could rise on world markets to triple digit per barrel levels while our pump prices were steady: the rising Canadian dollar offset the rise in a commodity priced in US dollars (which are increasingly becoming so much waste-paper with US deficits and money creation running at 18%+ per year. Thank you, credit bubble and bailout of the boys in the Hamptons.)
It is important to recognise, moreover, that Canada’s dollar is a very minor part of the world system. Australia’s looms larger. There is a price we pay to be the geographic neighbour of the US market, and enfolded in NAFTA, which can be boiled down to “to invest in North American assets, look to the US dollar”. What this means is that the market, all on its own, presses downward on Canada’s dollar out of benign neglect (or the international expatriation of profits from branch plants or formerly Canadian companies) until a US “crisis” erupts, at which point US investments are traded in for Canadian ones.
How Bad Do You Want Things to Be?
In any event, it would take extraordinary currency debasement — and a dropping of interest rates far below a real return of zero — to “crash” the dollar to the US$0.80 range needed to “reawaken” Central Canadian manufacturing. Branch plants are not managed for long term success, merely short term profitability — international firms open and close them as variable costs, without regard to the community. Only a significant sustained discount keeps them open through normal variability of demand.
So what would an “80-cent dollar” mean? Well, for openers, that’s another 25% price increase on everything imported. Good heavens, we have yet to shame Canadian retailers into adjusting prices to reflect a dollar essentially running at par with the US — there are a legion of “reasons” why this can’t be done — but you can count on the fact that, overnight, prices would reflect the change (since, for inventory on hand, it’s pure profit, and for new inventory, it’s essential to deal with changed import prices).
Even Ontarians would pay this. Another 30¢ a litre for gasoline, Toronto? Grocery bills that go from $200.00 at Loblaws to $250.00 for the same basket of “stuff”? Even most products labelled as “Made in Canada” are 50%+ ingredients imported.
Be Careful What You Wish For
No, Garth Turner’s “solution” is another massive slash in the Canadian standard of living, hard on the heels of the slash we’ve already experienced in the past year as our dollar stopped rising and commodity prices have started to pass through.
Of course, for commodities sold from Canada, life carries on, but with a 20-25% increase in terms of their Canadian dollar value. So these exporters simply do better. We won’t mention the likelihood of “softwood lumber war ∞+1 (yes, I know, that’s not mathematically correct, but there have been so many I’ve lost count) as Canadian softwood suddenly has a price advantage again in the shrunken US market. We also won’t mention the further unbalancing of the Federation, as the West gets much richer and the rest doesn’t (with the possible exception of Atlantic oil).
It’s time Canadian companies, and Canadian citizens, recognised reality. We have very different economic needs in different parts of the country. Central Canada, having failed to anticipate the days of parity (and the potential to, Euro-like, jump well above the US dollar — the Euro zone having gone from US$0.84 to US$1.59 as we went from US$0.63 to parity, so these countries’ companies must deal with an even steeper differential), now (and in this Garth Turner isn’t on the wrong track) needs a slack currency — one that would depreciate significantly relative to the West, which needs and benefits from a strong one.
Of course, to achieve that, you’d have to break up the country. But giving the East the slackness it now needs will lead in that direction anyway.
So here’s reality: suffering, innovating, investing and solving the problems in the weaker areas of Canada is a challenge those places must face and solve in the current matrix of currency values. Any other course of action just makes things worse.
The other answer, of course, is redistribution. We made this a Constitutional priority via locking in Equalisation, and many, many Federal programmes carry this further in specific ways. Indeed, Dion’s Green Shift(™appropriated) is yet more redistribution of wealth — take from the producers to give to the consumers.
In a Confederated nation, there comes a point where the nation falls apart if it does not do something to “bring up” its weaker areas. But handing out money taken from other parts of the country is seldom the most effective answer. Making it easier to make good use of the resources available in the country is usually a better long-term answer. So, too, is delivering on infrastructure to help these areas develop appropriately. (Given our energy issues — first of price, second of sheer availability, as supply continues to fall behind demand globally — we’d be smart to build electrified rail-based trams and trolleys, interurbans, and heavy rail, and fairly quickly, and use nuclear plants as well as renewable sources to power them. Car culture, in other words, needs to pare back and ultimately be phased mostly out.)
The best gift of all, of course, to make weaker regions stronger is to reduce the tax take by amounts large enough to make a difference. This requires programme elimination and serious programme reduction. In other words, to be healthy in the 2010s, we need to do again what was done in the 1980s and mid-1990s and cut government down, focusing it on a few tasks and really putting an emphasis on them.
Handing them yet more programmes — which themselves are underfunded relative to immediate demand — as the Dion Green Shift(™appropriated) offers to do, will also just make the problem worse.
Our so-called “Conservative” Government has, of course, taken a very “Liberal” approach to its time in Ottawa. It is not too late to change course, stop slopping money around like drunken sailors, picking a few priorities — and closing down programmes to pay for them (please note I said “end”, not “reduce”: once it’s gone and the function disbanded, it has a much harder time rising from the dead).
Let’s hope sanity prevails. Ontario and Québec need it as much as do the Atlantic provinces and the West.